Chancellor hails efforts on economic growth and deficit reduction in the
Autumn Statement, but figures show prices continue to outstrip wages

The squeeze on households’ living standards will continue for several years, official figures disclosed on Thursday, but the end of the biggest economic crisis in history is finally in sight, George Osborne declared.

Treasury forecasts showed that, proportionally, prices continue to outstrip wages, with many people expected to be worse off than they were before the financial crisis until at least 2018.

However, the Chancellor used his Autumn Statement to unveil more optimistic forecasts, telling MPs: “Our economic plan is working.”

The economy will grow 1.4 per cent this year, more than double the rate forecast in the Budget in March, official predictions show. Next year’s growth will be 2.4 per cent.

“The hard work of the British people is paying off and we will not squander their efforts,” Mr Osborne said. “The plan is working — it is a long-term plan for a grown-up country. The job is not yet done but Britain is moving again — let’s keep going.”

The improved outlook for the economy and public finances saw Mr Osborne cheered by Coalition MPs in a confident Commons performance that contrasted with his Labour shadow, Ed Balls, who struggled to make himself heard as he responded.

With the Government still borrowing more than £100 billion this year, Mr Osborne had little room for giveaways. But he announced that another rise in fuel duty would be cancelled, while high-street shops and other retailers would benefit from tax cuts of up to £1,000.

It was also announced that the state pension will rise by £2.95.

More than four million married couples will be given tax breaks worth up to £200 a year under a new policy that allows a husband or wife to transfer £1,000 of their unused personal tax-free allowance to their spouse. The personal allowance will be raised to £10,000 for next April.

The Chancellor told MPs that around £1 billion of taxes would be introduced, mostly aimed at what he said was tax avoidance. Wealthy foreigners will have to pay capital gains tax on their UK properties, as will British expatriates.

At the same time there will be £3 billion of departmental spending cuts.

But the Treasury’s Office for Budget Responsibility (OBR) warned of an approaching housing bubble, forecasting that prices will rise by almost a fifth in the next three years. Prices will rise 3.2 per cent this year, 5.2 per cent in 2014 and 7.2 per cent the following year, it said.

The figures suggest that prices will be rising most strongly as Britain prepares to vote in the 2015 general election.

Even though Mr Osborne admitted that the job of repairing the public finances is far from over, some Conservative MPs believe Thursday’s exchanges mark a turning point and the economy will become a political asset for the party at the next election.

However, calculations from the OBR show that it will be several years before households start to feel the benefit of Mr Osborne’s recovery. Forecasts for inflation and earnings show that prices are continuing to outstrip wages.

Measured on the Retail Prices Index gauge, inflation will exceed average earnings until at least 2018, OBR figures show.

According to the Resolution Foundation, a think tank, the weekly real wage of the typical worker is likely to be £430 in 2018, the same level it was at in 2003.

OBR figures also show that even when real wages start to rise again, households’ spending power will remain well below its pre-crisis level for several years.

John Cridland, director general of the CBI, said: “As we enter the festive season, positive news on growth is clearly welcome but much remains to be done if the benefits of economic recovery are to reach every home in every corner of the UK.”

Recovering growth means that the Government will raise more in tax and so borrow less, Mr Osborne said, though more spending cuts and tax rises will still be needed after the next election.

“The job is not done,” he said. “We seek a responsible recovery. One where we don’t squander the gains we’ve made, but go on taking the difficult decisions.”

Because of the recovery, the Coalition’s target of clearing the deficit will be met a year earlier than expected, in 2017/18, Mr Osborne said.

The following year, the Government will actually run a surplus, a financial excess Mr Osborne hinted he would use to pay down the national debt instead of handing to taxpayers in tax cut.

“Using surpluses in good years to keep debt falling, we fix the roof when the sun is shining,” he said.

The Government deficit will be £111 billion this year, £9 billion less than expected. Over the following four years, the Government will borrow £249 billion, around £73 billion less than expected.

That is the equivalent of £2,500 less for every household in the UK, Mr Osborne said.

However the OBR warned that the recovery in the public finances is “cyclical, not structural”, meaning that even in good times, the State will spend more than it earns. Closing the “structural” gap in the public finances will require long-term reforms like a permanent cap on welfare spending and a new charter for the OBR that would commit future governments to reducing the national debt.

The national debt – the accumulated total of government borrowing – will also be slightly smaller than forecast.

The debt currently stands at £1,269 billion, equivalent to more than 75 per cent of the whole economy. Debt will rise to £1,573 billion by 2018/19. As a percentage of GDP, debt will peak in 2015/16 at 80 per cent.

Mr Osborne had set himself a target of the national debt falling as a percentage of GDP in 2015/16. The new forecasts show he is still on course to miss that goal by a year.

The cost of paying interest on the national debt will rise steadily over the coming years. This year, taxpayers are paying £49.5 billion in interest payments, more than entire defence budget.

By 2018/19, debt interest will cost £76.9 billion. That is equal to what the Treasury raises from council tax, fuel duty and stamp duty combined.